Future of SME contractors is "threatened", says Constructionline

Published: 02 April, 2014

The rising cost of doing business, coupled with an escalating pricing war, is threatening the future of SME contractors, according to Constructionline.

In a survey of almost 700 SME suppliers, three quarters said they have had to lower their rates in order to win work, with the vast majority (94%) claiming that cost is the most important factor to clients when tendering.

Competition from larger firms, which are continuing to compete at the smaller end of the market, was cited as another major challenge during the tender process by 60%.

The survey also found that:

At the same time as facing downward pressure on quoted prices, the rising cost of materials is also making life difficult for these smaller firms. Eighty-eight percent stated they had noticed an increase in material costs over the past 12 months. Constructionline's survey identified it as the main threat to the industry's recovery in 44% of cases, while half of SMEs claimed that buying materials was the biggest cost pressure they faced, coming just behind wages (67%)

With squeezed margins, few of the survey's respondents believe that they are benefiting from the reported upturn in construction sector activity. More than half claim they are yet to see the effects trickle down the supply chain

However, Constructionline's survey did reveal evidence that workloads were increasing with 49% reporting a rise. Meanwhile, 54% are optimistic about seeing an improved pipeline of activity over the next three months

In addition, new jobs are being created as a result of increased activity. When asked whether they had taken on any more staff in the last quarter, 42% claimed to have recruited additional people, and the same amount expect to do so again over the next three months

That said, the respondents were critical of the support available to them to help create more apprenticeship roles. Only 22% are considering taking on an apprentice, with just under half (47%) saying that they could do so with easier access to funding

On a brighter note, there are positive findings in relation to PAS91, the standardised prequalification question set developed in conjunction between government and industry stakeholders. Forty-nine percent of SMEs said they had heard of the standard, compared to 35% in the previous quarter, indicating an ongoing increase in awareness.

Neil Thompson, director at Constructionline, said: "On the face of it, inflated order books and an influx in recruitment activity would suggest that the construction industry is once again on the road to recovery, but beyond these stats, there is a very different picture. Higher outgoings and lower returns mean that conditions still remain incredibly challenging for construction SMEs.

"While workloads are indeed improving, the sector's recovery is starting from a very low base after years of decline. Fierce price competition – a legacy of the recession – lingers over the sector's smaller firms, while larger firms are finding they still need to hunt at the tail end of the market.

"While the recovery continues to build, it's important that clients remember the risks posed by 'lowest price wins', to place more emphasis on skills, competencies and developing the workforce."

The results represent the opinions of 682 Constructionline members with a turnover of less than £50m per year. Forty-four percent fall under the £1m turnover category.

Other highlights of the survey include:

The private market is presenting the most opportunities for work, with 49% claiming to have won work in the sector

Thirty-two percent are winning work with local authorities, down from 42% on the previous year

Local authorities were identified as the most prompt with payment by 39% of respondents.